Commercial Real Estate Update: Leasing Market Snapshot In Sydney, Melbourne & Brisbane

March 10, 2021 | Commercial Real Estate

The Australian leasing market has shifted gears. On the Eastern Seaboard, tenants are in the driving seat. And that’s here to stay. 

Take a look at our latest commercial real estate update: A snapshot of the leasing market in Sydney, Melbourne and Brisbane, as well as some key trends driving outcomes.

Sydney

In the Sydney CBD, gross face rents remained unchanged towards the end of 2020, with Premium grade now averaging around $1,485 psqm, A-Grade hovering at around $1,275 B-grade sitting at circa $1,035 psqm. Gross face rents also remained fairly stable in Sydney Metro markets.

Net effective rents, on the other hand, have been substantially affected by the pandemic. In 2020, they fell between 11%-13.8%, depending on the grade of stock and location. In the CBD, net effective rents currently average around $1,015 psqm for Premium stock, between $775 and $950 psqm for A-Grade and $655 and $745 psqm pa for B-grade. While in the metro market, the worst hit were A-Grade rents, which declined by an average of 7% last year. They now sit between $350 and $675, depending on the suburb.

The continual drop in effective rental levels has been largely driven by a rise in incentive levels, with gross incentives in both CBD and Metro areas and across all grades now ranging between 29% to 35%. Though changes in gross face rents have slowed, we expect incentives to continue to creep up. And, this year, anticipate that there will be a point where average market incentives will be so high that landlords will be forced to address the level of their face rents.

Effective rent levels have also been affected by a steep rise in the vacancy rate. It jumped from 3.9% in January 2020 to 5.6% in July 2020 and is now hovering at an average of 8% in the Sydney CBD. The steep spike in vacancy has been spurred by:

  • An increase in subleasing stock, which is now at a record high as companies reassess their current and future needs
  • New stock, which is due to hit the market over the coming 12 months

Australian Leasing Market Data - Sydney

Melbourne

Melbourne’s leasing market has also been heavily affected by the pandemic, even more so after the second round of lockdown measures. 

Unlike Sydney, Melbourne’s net face rents (bar A-grade) have taken a hit, with Premium grade rents now sitting at $690 psqm and B-grade now sitting at $533. On the other hand, A-grade rents increased by 1.6% in Q4, and now sit at $635 psqm. Metro market net face rents have remained relatively stable.

Melbourne markets also saw sharp increases in incentives last year, averaging between 35-37% in Melbourne CBD and between 31-33% in city fringe markets. And these increasing incentives have seen net effective rental rates for Premium, A-Grade and B-Grade premises fall to $450, $395 and $345 respectively in the CBD. The spike in net incentives has also placed downward pressure on net effective rents in metro markets, which now attract between $269-$390 psqm.

Like Sydney, effective rent levels have also been affected by a steep rise in vacancy, now sitting between 5-7%, depending on submarket and location. This rate has also been spurred on by an increase in subleasing stock, which jumped from 0.7% at the outset of 2020 to circa 2.3% in October 2020 and continues to rise. Injection of an additional 3.4% of new stock over the next few months will put further upward pressure on this rate.

Australian Leasing Market Data - Melbourne

Brisbane

Brisbane’s CBD market has been relatively unaffected by the pandemic. Gross face rents have remained mostly unchanged over the last 12 months, sitting at between $850 to 880 psqm for Premium grade, $685 to $725 for A-grade and $585 to $630 for B-grade. This stagnation was also felt in metro markets, with gross face rents hovering at circa $610 in South Brisbane, $520 in the inner west and $615 in Fortitude Valley.

The average vacancy rate in the Brisbane CBD is relatively high at an average of 12.7%. However, unlike Sydney and Melbourne, this level of vacancy has not come about due to the pandemic. Brisbane’s vacancy rate was already reasonably high pre-COVID (because of the mining downturn) and has not worsened. Post-COVID, the city has been relatively spared due to its diverse pool of tenants, high government occupancy, affordability and minimal supply of new stock. 

Incentive levels on offer are also high at an average of 37% in the CBD. And on the fringe, gross incentives are now hovering around 35% in South Brisbane, 40% in the Inner West and 38.5% in Fortitude Valley. This gives commercial tenants the upper hand at the negotiation table and is not expected to change in the foreseeable future.

Australian Leasing Market Data - Brisbane

Market Trends In Sydney Brisbane and Melbourne

  1. Lease flexibilityUncertainty and low business confidence means more tenants are demanding shorter leases, transparency and break clauses. And landlords are responding by offering flexible lease terms, speculative fit-outs and removal of make good clauses.
  2. Incentives on the increase – As business conditions soften, overall leasing activity in Sydney and Melbourne has drastically flattened. This is placing more pressure on landlords to increase incentives to attract high-quality tenants.
  3. Rise in subleasingIn Sydney and Melbourne, the amount of available sublease stock has surpassed what was available during the GFC and is now approaching the historic highs of the 1990s recession. This is the opposite of what we saw before the pandemic, where various companies were leasing more space than necessary to allow for growth. The subleasing trend is expected to continue, with more and more companies declaring that they will not need as much space in the future. You can read more about the pros and cons of subleasing here.
  4. New supply expected to slow – In Melbourne, around 700,000 sqm of new commercial stock is due to hit the market between 2020-2023. However, we expect minimal new construction after this time. Developers now face several new challenges, including increased risk and higher pre-commitment hurdles as vacancy rates continue to grow. So, it’s safe to assume that any longer-term project that was earmarked for commercial use will be pushed back or considered for alternative uses.
  5. Vacancy rates – The average vacancy rate in Brisbane is expected to rise by around 1% over the next year to 13.7%. However, Premium grade vacancy is forecasted to remain under 10% until 2022 and beyond.
  6. Return to the office is slow in Brisbane – Though the Government and Landlords have encouraged a return to the office, this is not happening at the expected rate. In fact, most medium-to-large businesses still have their staff working from home on a part or full-time basis.
  7. Major infrastructure projects in the pipeline – In Brisbane, the Cross River Rail, Queens Wharf, Brisbane Metro and Brisbane Live are underway, which will help boost the economy and business confidence.

Other Major Cities

There are not enough post-COVID leasing deals to extract new trends because sample data is so small. However, Tenant CS is active in these markets. Call on us to learn about one-off transactions that are being concluded and for a commercial real estate update.

How We Can Help

At Tenant CS, we help you source the perfect office space for your business needs and negotiate the best possible lease terms on your behalf.

Contact us today to find out how we can help you!

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